Friday’s Markets: Stocks wobble as interest rate fears grow

In addition to Fed interest rate nervousness, a potential oversupply of crucial commodities worries investors in materials, commodities and industrials.

Sidewinder in Death Valley, California. This was the closest visual metaphor we could find to depict the U.S. stock market's current sideways motion. (Image via "sidewinder" entry via Wikipedia)

WASHINGTON, March 3, 2017 – It’s déjà vu all over again in Friday market action, with the last two trading days strongly resembling the action earlier this week on Monday and Tuesday. Markets appeared to be doing a “sideways correction” dance until that shocker of a post-Trump Speech rally on Wednesday.

If Friday’s averages close down once again this afternoon, we may see that that Wednesday run was merely an impressive but very brief interlude in our apparent sideways correction.

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For readers who don’t regularly invest and aren’t familiar with the terms, markets can rally hard and crash hard, establishing obvious trends either up or down. But at some point, trends will inevitably reverse direction when they hit extremes of optimism and pessimism, which is when we get big rallies (to the upside) or massive crashes (to the downside).

But a kinder, gentler alternative to these inevitable moves is what’s often termed a “sideways correction,” meaning simply that stocks and market averages just meander for a time—sometimes for a considerable time—until they’re ready to resume their previous direction, whether it’s a rally or a continuing downside crunch.

The rationale behind this is as much psychological as it is economic. Once excitement sets in, it’s hard to halt a big rally like the current Trump Rally that launched out of the blue on November 9 when the world discovered that the Republicans’ lousy Presidential candidate had actually topped the Democrats’ pre-anointed one, an event that promised to unleash the animal spirits of American businesses and entrepreneurs after 8 long years of repression.

Until this rally well and truly stops, pauses like the one we’re experiencing again today can actually be welcome breathers, allowing, albeit slowly, corporate earnings to catch up with investor expectations. Investor psychology remains positive, so the move up is likely to resume at some point.

But when the psychology changes, the scenario reverses as traders and investors start to panic out of the market, selling or shorting everything in sight. So this week’s market pause (exempting that surprising Wednesday action), could actually go either way. The pause, with its slight negative bias, could be profit taking ahead of the next leg of the rally. Or, on the negative side, it could be a sign that buying power is exhausted leading to either a slow and steady exit or a panicked one.

Adding to this month’s uncertainty is the once faint but now allegedly certain Federal Reserve interest rate hike TBA on the Ides of March. (Or not.) While this hike is probably a good thing in the longer run, rate hikes do have a tendency, early on, to dampen economic activity as well as trading in bonds and bond surrogates like utilities, REITs and telecommunications companies. A March hike could also dampen mortgage lending and international trade, or so some investors will fear.

Another interest rate hike is clearly worrying the precious metals trade as well. This week, gold and silver in particular have slipped into smackdown mode, as have the mining companies involved with those metals.

Ditto copper miners, though for different reasons mainly involving the current antics of the always-volatile Indonesian government, which currently seems intent on negating its current contract with Freeport McMoRan (FCX) in that country, crimping worldwide copper supplies in the process. The nasty Chilean copper miners’ strike doesn’t help, either.

Another potential negative: We may be once again entering a period of fossil fuel overabundance as U.S. exploratory and production drilling has resumed, big time. If inventories build (as they apparently have been), this puts downward pressure on fuel prices, leading to industry slowdowns and layoffs.

Our own attitude here is that the negative action currently moving markets may have already discounted a March 15 interest rate hike, meaning that stocks may very well resume their upside bias on or around the date the rate hike is (or is not) announced. Oil and gas producers likewise have been correcting lately to compensate for that potential oversupply of fossil fuels.

We rarely if ever try to outguess the enigmatic and, perhaps, greatly confused Fed, which consistently ignores the U-6 unemployment numbers (currently between 9 and 10 percent—twice the official numbers) in its consideration of future interest rate increases. But they will do what they will do, and then we’ll decide what we will do accordingly.

All that means for all rational investors is that it’s probably best to avoid massive commitments right now until the monetary smoke clears, at least a little.

On the whole, Wednesday’s big rally should actually give us a positive weekly close by 4 p.m. today, so that’s still a big plus for investors no matter which way the winds of change might be blowing next week.

See you on Monday unless compelling news breaks over the weekend.

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